Corporate governance is the system by which the companies are directed and controlled. The objective of corporate governance is to establish accountability for effective and efficient operations of companies. It is concerned with control environment, control procedures, risk management, and on going monitoring including operation of the audit committee.
In limited companies shareholders provide substantial funds to directors. The shareholders are interested to find out whether their funds have been used efficiently and effectively. The existing audit reports do not provide comments as to how the resources were managed by the directors. A good corporate governance is therefore vital.
KEY REQUIREMENTS OF CORPORATE GOVERNANCE
A good corporate governance includes following:
– There should be regular meetings of the Board of directors.
– Duties of the chairman and chief executive should be segregated.
– Authorities of the individual directors and the board should be clearly defined.
– Matters to be referred to the Board should be clearly identified.
– Such matters should include acquisitions and disposal of assets of the company, investments in subsidiaries and associates capital projects, bank borrowing facilities and their repayment schedules, and foreign currency transactions.
– There should be no business or financial connection between the non-executive directors and the company except for fees and shareholding.
– Fee of non-executive directors should be charged on the basis of time spent.
– Directors’ emoluments should be disclosed in financial statements.
– Non-executive directors should review emoluments of executive directors.
– Audit fee should be disclosed in the financial statements.
– Professional bodies should consider rotation of audits in a systematic manner.
– The directors should review internal control systems, at least annually.
– The Board should establish an audit committee.
– Risks within the organization should be evaluated.
– The nature and extent of acceptable risks should be identified.
– Consider threat of risks realizing.
– Consider ability to reduce incidence and impact of the risk.
The annual report should include a corporate governance statement
setting out how the company has applied corporate governance principles.
ROLE OF INTERNAL AUDITOR
1. Review company’s measures to achieve corporate governance.
2. Ensure that priorities of internal auditor are consistent with the major risks identified by the Board.
3. Provide information to the audit committee to assist effectiveness of the system of internal controls.
ROLE OF THE AUDIT COMMITTEE
- Coordinate with external auditor.
- Ensure implementation of recommendations made by external
- Review reports from internal auditor on management of risks.
- Review annual financial statements.
- Appraise the risk polices and strategies to achieve corporate goals.
EXTERNAL AUDITOR’S ROLE
The auditor should review company’s compliance with certain aspects of the corporate governance. He should also read the statement in the annual report made by the company as to whether or not they have complied throughout the accounting period with the corporate governance.
The matters to be reviewed include:
– Does the Board have a formal schedule of matters specifically reserved to it for decision?
– Is there a procedure .to take independent professional advice where necessary?
– Are non-executive directors appointed for specified terms and their re appointment is not automatic?
– Have the directors acknowledged their responsibility for preparation of financial statements?
– Do the directors at lest annually, conduct a review of the effectiveness of the company’s system of internal control?
– Are all directors elected by shareholders?
– Has the Board established an audit committee?
Evidence for above can be obtained from reviewing minutes of the directors and relevant committees, attending meetings of audit committee and reviewing relevant supporting documents.
The Institute of Chartered Accountants of Pakistan has approved the issuance of following for the guidance and compliance by the members:
1. Checklist for Code of Corporate Governance including its Introduction and Explanatory Comments.
2. Review Report to the members on Statement of Compliance with Best Practices of Code of Corporate Governance (Clause (xlvi) of the Code.)
3. Review Report to the Members on Half-Yearly Financial Statement (Clause (xxi) of the Code.)